Each year in M&A Trends, Torys examines the forces that will shape business in the year ahead. This year's 10 trends cover some of the latest developments in M&A, from new deal dynamics and foreign investment to expanding shareholder engagement.
Take a look at our M&A Trends companion video and read all 10 articles online. You can also access a full pdf version here.
Overview
The year 2014 saw corporate Canada continuing to adapt to the new realities of shareholder activism. Both activist tactics and board responses to activist overtures are evolving. We are seeing a class of activists shift their focus from "winner-take-all" campaigns to an approach of influencing change through proposed operational initiatives or specific transactions. Boards are becoming more responsive to activists' constructive approaches, increasing the potential for more negotiated settlements. We expect this trend to continue.
Expanding investor engagement is creating new challenges in M&A. Public companies looking to grow through acquisitions or to divest parts of their business are recognizing the significance of investor support to successful execution of their M&A strategy. As they continue to respond to greater demands for transparency, they face disclosure pressures from investors who are increasingly engaged and less deferential to boards and management. Separately, dissatisfied investors of M&A targets have, at least in the U.S., been resorting to appraisal litigation as a way to improve deal terms, turning it into a form of deal arbitrage.
In contrast to these buy-side considerations, potential M&A targets can expect to wield more leverage to negotiate deals. Canadian takeover bid rules are changing to empower boards by giving them more time to respond to unsolicited bids. These changes come at a time of growing government skepticism and political concerns about certain types of foreign investment in domestic businesses. M&A deals will continue to get done in Canada, but we predict that bidders will proactively tailor their strategies to accommodate the changing rules and this new wave of protectionism.
In the U.S., the Obama administration's clampdown on inversions is similarly influencing M&A. Although the U.S. government's anti-inversion rules and proposed measures will curb some tax inversion structures, we expect that inversion opportunities for companies seeking to expatriate to other countries will continue in 2015.
In relation to inbound M&A opportunities, we expect North America to continue to draw particular interest from Japanese investors who are looking to overseas markets for investments that can contribute to their long-term growth and sustainability. The renewable energy sector represents a natural fit for the growing pool of acquirors seeking sustainable long-term assets, positioning the sector well for ongoing M&A activity in 2015. For resource players, we expect that buyers of Canadian resource development targets will pay increasing attention to whether appropriate consultation and accommodation have occurred with local Aboriginal communities in light of recent court rulings.
Investors considering other M&A prospects in the year ahead should expect a competitive deal environment. High valuations for good assets in this seller's market are just one of the factors encouraging private equity players to pursue co-investment transactions. We expect the strong demand for co-investments to continue and accelerate in 2015. In private M&A, sellers benefiting from the market's recent frothiness may seek use of the "locked-box" deal structure, which is gaining popularity, especially in the context of "hot" auctions.
Torys looks ahead to the 10 trends that will shape business in 2015.
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